The S&P 500, by contrast, is an astounding valuation levels compared to any kind of history
For example, it’s trading at about 2.99 times sales, and the average from just the last 10 years is 2.03 times sales.
Well, why would it matter? It will matter if your margins are same and your price to sales increases. Is SP500 Gross and operating margins same as 10 years ago?
I understand the mean reversion argument, but sometimes structurally few things change. If you take the top 15 companies in sp500, they carry higher gross and operating margin than any other time I could think of. Apple, Microsoft, Google, FB are very high margin business.
Instead of looking at price to sales, I would look at margin and price to EBITDA or operating profit would be a better number to look at.
Using smoothed real earnings, it’s 38-48% overvalued compared to averages in the last 15,20,25, or 30 years.
Earning increase over time and interest rates are lower compared to 15, 20, 25, 30 years. In 1990 we had 8% 30 year UST and 2000 we had 6% 30 year uST, even in 2008/2009 we had 4.5% and today we have 2.5%.
Unless you expect rates are going back to 4%, 5%, 6% o 8%, in which case one should be comfortable to short the market, we should factor interest rates in to the valuation.
Even if valuation levels never fall, forward returns must necessarily be low from here.
Can someone remind me why anyone is entitled to 15% return when your risk free rate is < 3%.
Sales can’t grow faster than GDP over decent time frames
But is it true for SP500? What may be true for the entire economy may not be true for handpicked 500 top companies. I mean how many times we heard Amazon cannot grow faster than retail???
So, though the observation is correct that both BRK and SPY are both getting good valuations today,
the S&P seems to have a lot more air below it if we see anything like future valuation levels resembling recent averages.
Let us flip this a bit. When are we going to ask why Berkshire, a GEM with outstanding operating business, with genius capital allocator is perennially undervalued than the average sp500 company? or Perhaps it is not?? If you remove few really high valued companies out of the index, than Berkshire valuation may not be any different than the rest of the index?
First, FOMO is not a good thing.
IS FOMO relevant here? If you have cash, and you have a relatively long-term horizon, why not invest over a period of time and build the portfolio? Just asking…